Banking Competition

David Rutley Excerpts

Thursday 12th July 2012 Westminster Hall

[David Rutley (Macclesfield) (Con)]

It is a pleasure to serve under your chairmanship today, Mr Davies—the first time I have done so.

I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing the debate. She is a champion of competition in banking, which she has consistently fought for and campaigned on as a Member of Parliament.

It is great to participate in the debate, because financial services are undoubtedly an important part of our economy, which we have all discussed. The sector is vital in its own right—10% of GDP, more than 1 million employees and a contribution of £53 billion in tax to the UK Exchequer in 2009-10—so we cannot afford not to pay attention to what goes on in it. More to the point, the sector has major implications for a sustainable recovery, because if we do not have a sound banking system that is trusted by all participants in the economy, we will not see the sustained economic growth that we all want and that we all champion—on the Government Benches at least.

According to the World Bank, the UK banking sector, and in particular its assets, is one of the most concentrated banking markets in the G8—if not the most concentrated market—with the combined assets of the three largest banks comprising 88% of the market; in the US, the three largest banks comprise 37% of the market, which is a fundamental difference. That state of affairs cannot be attributed to the financial crisis, because in 1993, almost 20 years earlier, the UK still had 86% of assets tied up in the three largest banks, while the US stood on a much lower total of 21%. For a market economy, which my hon. Friends and I fully support, such a situation is clearly sub-optimal and must be addressed, and I am delighted that the Government are taking it seriously.

I am pleased to see new entrants to the market. The hon. Member for Islwyn (Chris Evans) was concerned about the lack of new entrants and the over-emphasis on a sales culture. I understand such concerns, but the fundamental approach of Metro Bank on entering the market has been about customer service, and it is encouraging to see businesses trying to take a different approach and a different market niche. Not only Metro Bank has a presence in this important market but Virgin Money, Tesco, Sainsbury’s and Asda, my old employer—yours, too, Mr Davies. Their role is increasingly important in making life more challenging for those banks that have been all too comfortable about their position in the marketplace.

Recently, The Times reported on the retail financial services sector, and I will refer to that article, because to see what has been happening is important. Tesco bank now has 6.5 million customers; it started in 1997, after buying out RBS, and in the near future intends to offer mortgages—an important step by a non-traditional bank or retail financial services operation. Marks and Spencer, with 3 million customers, will soon open bank branches in its stores—again, a chance to make a bit of a difference and to move things on. Sainsbury’s has 1.4 million customers and Asda, which I had the chance to establish in financial services, has rebranded this past week as Asda Money and is looking to launch a new credit card.

There are moves afoot therefore, and given the new depths of the lows of trust in banks and financial services, businesses such as retailers have a clear opportunity to come in with their much higher levels of brand trust and to reassure customers that they have something different to offer. I wish them success in making progress; it is not all doom and gloom on increasing competition, but we need to get behind the providers offering new opportunities for customers.

I agree with my hon. Friends the Members for Wycombe (Steve Baker) and for South Northamptonshire about the portability of accounts and increasing the switching capability. It cannot be right that inertia is the basic building block of a business model. The model has to be more dynamic. We must ensure that dynamism and competition lead to profit, not inertia, which is insulting to customers, frankly. From our own experience we all know that trying to transfer banks is an absolute nightmare—that must be addressed.

United Kingdom Financial Investments has a real opportunity to contribute to shaking up the lack of competition in financial services. The paper by the Free Enterprise Group has set out some bold, radical alternatives—characteristic of the group—and UKFI should look carefully at how it disentangles taxpayers from the Lloyds Banking Group and RBS, to sell off business units and branches to enable the more competitive financial services marketplace that we all want and shout out for.

We also need a stronger foundation to enable that competitive environment to thrive and flourish, and it is worth while pointing out how fast the Government are moving on regulation to help put that into place. I applaud the Government for introducing the Financial Services Bill—it was an honour to be on the Committee—which will be critical to restoring accountability to the Bank of England and away from the completely failed tripartite model that was found so wanting in the previous crisis.

The Government also intend to introduce a banking reform Bill, on which they should be congratulated. Others will want it to go further, but it is important that the Bill will provide for the ring-fencing of investment banks, separating them from the retail banking functions in the same organisation. The LIBOR-fixing scandal is only further evidence for the importance of the proposed legislation, which has the potential to be a vehicle for change. The proposed parliamentary inquiry, which we could call the Tyrie commission, can use the Bill as a vehicle to bring about any recommendations, which are so urgently needed. I hope that my colleagues on the Treasury Committee will have a chance to play their role in that commission, to help restore the trust needed in the financial services sector.

Regulation alone will not help bring about the foundations for genuinely competitive and trusted markets. We need to look at the shareholders, who have been too absent in the past. They need to speak out. The shareholder spring of increased shareholder activism is to be applauded, and it was refreshing to see BlackRock, one of the major shareholders in Barclays, speak out quickly and urgently during the recent problems with leadership in the bank. We need to see more of that. Shareholders must not duck their responsibilities in recalculating and rebalancing reward for results. In my opinion, those excessive bonuses are discrediting the market and the trust that we have in our financial institutions.

Having said all that, Members present might find it odd for me to say that I agree with Bob. That is, I agree with something that Bob said on the “Today” programme business lecture in November 2011:

“Culture is difficult to define, I think it’s even more difficult to mandate—but for me the evidence of culture is how people behave when no-one is watching.”

Sadly, while thousands if not millions of our constituents are working professionally when no one is watching, or even when their customers are watching, the leaders of our banks—recently, of Barclays in particular—have not displayed those virtues. Ultimately, real leadership will be required, and I wish Barclays well in finding a successor to Bob Diamond—an individual who will help to create that culture.

As we proceed with many of the ideas we have discussed today—to put in place the regulatory foundations, proper shareholder activism and the right culture and leadership—we stand a chance to have a financial sector that we are proud of. We will only achieve that, however, when we have proper levels of competition. I support the efforts of my hon. Friend the Member for South Northamptonshire and urge the Minister to press forward with every effort and his strength of character to enable us to see the new measures put in place so that we have true competition in the financial services and banking sector.